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Emerging Asian Economies on Track for Solid Growth, Report Finds

April 9, 2013 by Leave a Comment

HONG KONG — The economies of developing Asia appear to have settled into a new growth path that will allow the region to expand by between 6 percent and 7 percent a year — a pace that is significantly slower than that seen before the global financial crisis, yet represents a firm trajectory that could last over the next decade.

“It looks like we’re in a new trend,” said Changyong Rhee, the chief economist of the Asian Development Bank, which on Tuesday released its new forecasts for emerging Asia. The region spans developing countries like China, India, Indonesia and Thailand, but not Japan.

After relatively muted growth last year, when the region expanded by 6.1 percent, developing Asia is expected to pick up speed again with growth of 6.6 percent this year and 6.7 percent next year, according to the bank’s projections.

“The era of double-digit growth is over,” Mr. Rhee said. But, he added in an interview in Hong Kong, the United States is showing signs of recovery, and the euro zone likely to “muddle through” its debt crisis for the foreseeable future. That backdrop leaves developing Asia enjoying a relatively stable growth that was not yet visible just six months ago, when the development bank made its last projections for the region.

Faster growth in China — by far the region’s largest economy — and what Mr. Rhee called the “remarkable” resilience of southeast Asian economies have been the main drivers of growth there growth, lifting domestic consumption and intraregional trade, and in the process also reducing the region’s reliance on the world’s advanced, and slower-growing, economies.

Growth, however, will be very uneven, with China likely to grow at between 7 percent and 8 percent; the Asean region, comprising countries like Thailand and Malaysia, growing around 5 percent; and more developed economies like Hong Kong, Singapore or Taiwan expanding at little more than 3 percent.

Moreover, events in other parts of the world continue to pose major potential risks to Asia.

Among them, the development bank said, are the wrangling over the U.S. debt ceiling and the struggles to implement austerity measures in Europe. Border disputes within Asia, potential asset bubbles inflated by the monetary stimulus efforts of the world’s developed economies, and the possible reversal of capital inflows once that monetary stimulus ends also represent risks to Asia.

The Asian Development Bank also issued a stark warning on Asia’s rapidly growing energy needs. The region, the bank said, is moving along a “dangerously unsustainable energy path” that “could result in environmental disaster” and increase the region’s reliance on the oil-exporting nations of the Middle East.

“Asia could be consuming more than half the world’s energy supply by 2035, and without radical changes carbon dioxide emissions will double,” Mr. Rhee said. “Asia must both contain rising demand and explore cleaner energy options, which will require creativity and resolve, with policymakers having to grapple with politically difficult issues like fuel subsidies and regional energy market integration.”

Article source: http://www.nytimes.com/2013/04/10/business/global/emerging-asian-economies-on-track-for-solid-growth-development-bank-says.html?partner=rss&emc=rss

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Today’s Economist: Simon Johnson: The Debate on Bank Size Is Over

March 28, 2013 by Leave a Comment

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Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

While bank lobbyists and some commentators are suddenly taken with the idea that an active debate is under way about whether to limit bank size in the United States, they are wrong. The debate is over; the decision to cap the size of the largest banks has been made. All that remains is to work out the details.

Today’s Economist

Perspectives from expert contributors.

To grasp the new reality, think about the Cyprus debacle this month, the Senate budget resolution last week and Ben Bernanke’s revelation that — on too big to fail — “I agree with Elizabeth Warren 100 percent that it’s a real problem.”

Policy is rarely changed by ideas alone and, in isolation, even stunning events can sometimes have surprisingly little effect. What really moves the needle in terms of consensus among policy makers and the broader public opinion is when events combine with a new understanding of how the world works. Thanks to Senator Sherrod Brown, Democrat of Ohio; Senator Warren, Democrat of Massachusetts, and many other people who have worked hard over the last four years, we are ready to understand what finally defeated the argument that bank size does not matter: Cyprus.

There is no shortage of recrimination about how the Europeans handled the Cypriot situation. And it’s hard to feel good about a policy process that ends with the president of the Eurogroup of finance ministers, Jeroen Dijsselbloem of the Netherlands, flip-flopping on the most important issue of all: who will bear losses and in what precise order of priority, in the (likely) event of future euro-zone financial system meltdowns.

Specifically, Mr. Dijsselbloem began by making a clear statement on Monday regarding how the Cyprus situation would serve as a template for future assistance within the euro zone. After a few hours of falling stock prices for banks in peripheral Europe, he did not so much walk this statement back as sprint it back at full speed, with this remarkable retraction (provided here in its entirety):

Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday.

Macroeconomic adjustment programs are tailor-made to the situation of the country concerned and no models or templates are used.

I would translate this into plain English as: “We, the combined finance ministers of Europe, have no idea what we will want to do in the future — and we have no plans to work that out before bad things actually happen.”

My colleague Jacob F. Kirkegaard, a must-read expert on European policy and its nuances, is hopeful that Europe is moving toward a variant of the Federal Deposit Insurance Corporation rules-based approach to bank resolution, in which small depositors have complete confidence they will be fully protected and other kinds of investors understand where they stand relative to potential losses (and to each other).

Contrast the chaos of the last week and Mr. Dijsselbloem’s verbal contortions with what happened when IndyMac Bancorp failed in 2008 (on the latter, I recommend Chapter 7 in Sheila Bair’s book, “Bull by the Horns”). The F.D.I.C. has very clear rules, laid out by statute and reinforced by precedent. The agency knows how to close a small or medium-scale bank without a macroeconomic soap opera — and a national catastrophe. (IndyMac had $32 billion in assets when it failed.)

But the bigger point from Cyprus is much simpler. Why would you want one or two banks to become so large in terms of their assets relative to gross domestic product that a single mistaken calculation can bring down the economy? In the American context, why would you allow any bank to outgrow the F.D.I.C.’s ability to resolve it in a relatively straightforward and low-cost manner? (The largest bank failure handled to date was that of Washington Mutual, also known as WaMu, with $307 billion in assets; JPMorgan Chase, today the world’s largest bank when measured properly, has assets closer to $4 trillion).

According to their proponents, two troubled Cypriot banks, Bank of Cyprus and Laiki Bank (also known as Cyprus Popular Bank and previously known as Marfin Popular Bank), “only” made the mistake of buying Greek government bonds, before those were restructured and fell in value, reflecting the terms of the latest euro-zone rescue package for Athens.

The third largest Cypriot bank, Hellenic Bank, also has some problems but remains out of the news for now. (For background, see this Bank of Cyprus investor presentation through September 2012 and Laiki’s third-quarter results. In both cases, these are the latest available on their Web sites.)

But this single mistake resulted in combined losses worth at least one-quarter of Cyprus’s G.D.P., not just because the bets were big relative to the balance sheets of those banks, but rather because the banks are so big relative to the economy. Banking assets in Cyprus reached seven times G.D.P., with the Bank of Cyprus having a balance sheet valued at roughly twice Cypriot G.D.P. and Laiki only slightly smaller (see the investor relations presentations linked above, with more background at Figure 3 in this paper).

And in another case study for Anat Admati and Martin Hellwig’s cautionary book, “The Bankers’ New Clothes,” the Cypriot banks had wafer-thin layers of equity, so big losses have to fall on creditors (unless taxpayers somewhere are feeling generous). For Bank of Cyprus, equity was supposedly 2.3 billion euros at the end of the third quarter of 2012, when the bank’s assets were 36.2 billion euros. I haven’t seen a convincing statement of Laiki’s recent equity funding level. The chairman of the Bank of Cyprus resigned on Tuesday, although there remains some confusion about who among the bank’s board and senior management remains on the job.

Furthermore, these banks structured their liabilities so that their only real creditors providing private-sector funding were depositors (i.e., they issued very little by way of bonds or similar forms of debt). Hence the options became either a complete bailout supported by the euro zone (making the bank creditors whole) or losses for at least some depositors.

The scale of losses in the latter route will disrupt the economy for many years and is likely to end the Cypriot offshore banking model.

Given that we have a choice, why would any American want to allow a few banks to become so vulnerable and so big relative to the economy?

Our largest banks are not yet at Cypriot scale, thank goodness. But they want to get bigger and they receive implicit government subsidies, in the form of downside protection available to creditors, which enable them to borrow more and potentially expand without limit.

In fact, it was the stated policy of former Treasury Secretary Timothy F. Geithner to encourage these banks to grow further — for example, to provide financial services to emerging markets in Asia, Latin America and Africa. This is not any kind of market outcome but rather a poorly conceived and extremely dangerous government subsidy scheme.

The good news at the end of last week was that the Senate unanimously decided that the United States should go in another direction, by ending the funding advantages of megabanks.

The decision was expressed in an amendment to the nonbinding Senate budget resolution, but this does not make it any less momentous. The vote was 99 to 0, as a result of a lot of hard work by Senators Brown and David Vitter, Republican of Louisiana, and their respective staffs. Senators Bob Corker, Republican of Tennessee, and Mark Pryor, Democrat of Arkansas, also joined this important initiative.

Lobbyists were, naturally, apoplectic.

But making last week even more decisive, Mr. Bernanke’s language shifted significantly. In a recent interaction with Senator Warren, which I wrote about in this space, Mr. Bernanke had essentially denied that large financial institutions represent a threat.

Now he has denied that denial, saying in the clearest possible terms during a news conference on March 20: “Too big to fail is not solved and gone,” adding, “It’s still here.”

And in case anyone did not fully grasp his message, Mr. Bernanke explained, “Too big to fail was a major source of the crisis, and we will not have successfully responded to the crisis if we do not address that successfully.”

Now that the policy consensus has shifted, how exactly policy plays out remains to be seen (Rob Blackwell of American Banker has some suggested scenarios).

Legislation under development by Senators Brown and Vitter will definitely be worth supporting. Opinion on Capitol Hill has now moved in a way that will continue to reinforce itself, particularly as the European disaster unfolds.

The Federal Reserve’s Board of Governors is getting the message. Even William Dudley, president of the New York Fed, a traditional bastion of Wall Street, is signaling that he now knows which way the wind is blowing.

The Orwellian doublespeak of Wall Street — nicely described by Dennis Kelleher of Better Markets — has taken a beating. Next up: cutting the subsidies of the biggest banks in a meaningful way.

Article source: http://economix.blogs.nytimes.com/2013/03/28/the-debate-on-bank-size-is-over/?partner=rss&emc=rss

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Second Thoughts in Europe as Fear Spreads in Cyprus

March 18, 2013 by Leave a Comment

Outside, the A.T.M. coughed up 50-euro bills, as few as two or four at a time — a relief, since banks will remain closed through Wednesday. Yet it was still not enough to assuage fears.

“How can I trust any bank in the euro zone after this decision?” asked Andreas Andreou, 26, an employee at a trading company.

“I’m lifting all my deposits as soon as the banks open. I’d rather put the money in my mattress.”

In this windswept capital, and in the halls of power elsewhere in Europe, much of the day was given over to cross-border arguing and a public reluctance for anyone to take responsibility — some might say blame — for a decision that suddenly seemed like it might not be such a great idea, after all.

As a plan to tax deposits in exchange for a 10 billion euro financial lifeline for this troubled nation frayed nerves, it quickly set off tremors far beyond Cyprus’s shores. Stock markets around the world fell Monday — though American markets remained calm — amid the stark realization that Europe’s policy makers had made a significant departure from past efforts to keep the euro zone together.

Economists said the Cyprus plan set a worrisome precedent that could backfire. The plan “risks setting off a bank run and contagion,” said Michael T. Darda, chief economist at MKM Partners.

For the first time since the onset of the sovereign debt crisis in Europe and the bailouts of Greece, Portugal and Ireland, ordinary bank depositors — including those with insured accounts — were being called on to bear part of the cost, to the tune of 5.8 billion euros, about $7.5 million, of the 10 billion euro package.

The plan also would wipe out so-called junior bondholders in Cypriot banks, who would give up 1.4 billion euros in holdings. Only senior bondholders, who have paid a premium to be first in line for repayment of their investments, would be fully protected.

Under the terms of Cyprus’s bailout, the government must raise 5.8 billion euros by levying a one-time tax of 9.9 percent on depositors with balances of more than 100,000 euros, or $129,500. Those with balances below that threshold would pay 6.75 percent, an asset tax that would still hit pensioners and the lowest-income earners hard.

Cyprus’s president, Nicos Anastasiades, accused European Union leaders of using “blackmail” to get him to agree, and sought Monday to compel policy makers in Brussels to soften the terms.

As lawyers in Cyprus questioned the legality of both taxing deposits that are supposed to be insured up to 100,000 euros, and confiscating sums above that, Mr. Anastasiades postponed a parliamentary vote on the package until Tuesday, as signs emerged that lawmakers might not approve.

In Brussels, the club of 17 euro zone finance ministers that had signed the bailout plan for Cyprus held an emergency conference call Monday evening and tiptoed back from terms of the arrangement, by agreeing to consider a new deal that could lighten the burden for less well-to-do Cypriots.

In a statement, they said small depositors “should be treated differently from large depositors,” and said they were open to modifying the tax on those with less than 100,000 euros. It also appeared from comments made by officials that the I.M.F. was leaning that way as well.

But Jeroen Dijsselbloem, the Dutch finance minister who serves as the president of the Eurogroup, suggested that any new arrangement still would need to deliver 5.8 billion euros.

The brinkmanship followed a protest of about 800 people gathered in front of the presidential palace, shouting angrily at Mr. Anastasiades and inveighing against Germany and European leaders as he entered the building to meet with his cabinet.

“Merkel, U stole our life savings,” read one banner tied to a bus stop. “EU, who is next, Spain or Italy?” read another.

Liz Alderman reported from Nicosia, Cyprus, and Landon Thomas Jr. from London. James Kanter contributed reporting from Brussels, Andrew Siddons from Washington, and Andreas Riris from Nicosia.

Article source: http://www.nytimes.com/2013/03/19/business/global/19iht-cyprus19.html?partner=rss&emc=rss

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On the Brink in Italy

March 12, 2013 by Leave a Comment

“A year and a half ago, the noise from production was so loud that you had to shout to be heard,” said Mr. Tedeschi, walking amid pallets of cherry and other fine woods stacked up and waiting for a purpose.

Since a government austerity plan took hold last year, the Italian economy has tumbled into one of the worst recessions of any euro zone country. Mr. Tedeschi’s orders have all but dried up. His company, Temeca, is still in business, but barely.

Businesses of all sizes have been going belly up at the rate of 1,000 a day over the last year; especially hard hit among Italy’s estimated six million companies are the small and midsize companies that represent the backbone of Italy’s $2 trillion economy.

Economists worry that the pace of business closings may accelerate as long as the country lacks a functioning government. The departing prime minister, Mario Monti, was ousted by austerity-weary voters, but the election left Parliament gridlocked.

“With no one governing the country, there will be more paralysis, so things will get worse,” said Mr. Tedeschi, 49, casting a worried glance at his wife and their 23-year-old son. They help fill the trickle of orders, now that Mr. Tedeschi has had to lay off six of the 11 full-time employees he had in mid-2011.

With the European Union standing as America’s largest trading partner, the economic problems that plague Italy — and the rest of stagnating Europe — are felt across the Atlantic.

“This underscores the likelihood of Italy having a Japan-like decade with phenomenally slow growth,” said Kenneth S. Rogoff, a professor at Harvard and a former chief economist of the International Monetary Fund. “And it raises painful questions about the long-run stability of growth in the euro zone over all.”

Italy’s political quagmire might not disturb global financial markets right away, Mr. Rogoff said. But it raises the specter of the European crisis “grinding on and on,” he said, and it would certainly make it harder for European leaders to cut deals “on the big-picture things that are needed to stabilize Europe.”

The afflictions of Italy’s economy, one of Europe’s largest, are not new, of course: a lumbering bureaucracy, stifling labor regulations and an eroding ability to compete in the global marketplace. As the economy of the 17 members of the European Union that use the euro as their currency was expanding at a weak average of 1 percent a year for much of the last decade, Italy grew at only half that rate, according to the International Monetary Fund.

But Italy’s longstanding problems have grown worse in the last year as tax increases and spending cuts were pressed by Mr. Monti, who took over as prime minister in November 2011 after the euro crisis forced out Silvio Berlusconi. Last year the economy shrank 2.4 percent.

One in two small companies cannot pay its employees on time, according to CGIA di Mestre, a research institute. With layoffs surging, unemployment rose to 11.7 percent in January. Youth unemployment has jumped to 38.7 percent.

The austerity program was intended to reduce the risk of a debt crisis and ensure the backing of the European Central Bank, but instead it left the country with no growth. And without growth, Italy will have a harder time paying down its 2 trillion euros ($2.6 trillion) in debt, one of the largest debt burdens in the euro zone.

“For growth and unemployment to improve, we need to have a government that can remove uncertainty for businesses, consumers, investors and banks,” said Tito Boeri, the director of the Fondazione Rodolfo Debenedetti, a research firm based in Milan. “Political instability is probably one of the most damaging things for the economy.”

Gaia Pianigiani contributed reporting from Rome.

Article source: http://www.nytimes.com/2013/03/12/business/global/12iht-euitaly12.html?partner=rss&emc=rss

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Britain Takes On Brussels in Fight Over Bank Pay

March 4, 2013 by Leave a Comment

BRUSSELS — The British finance minister, George Osborne, is expected Tuesday to urge his European Union counterparts to water down proposed rules restricting the size of bankers’ bonuses.

The proposal is a sore point for Britain, which is home to Europe’s main financial hub, and where many in government and the financial industry worry that mandated limit to bonuses could make it harder for London to compete in international banking circles.

A failure by Mr. Osborne to win concessions during a monthly meeting here on Tuesday of the European Union’s 27 finance ministers could fuel disenchantment with the Union among restive members of Britain’s ruling Conservative party. Prime Minister David Cameron has already called for a referendum on Britain’s membership in the Union.

Yet if Mr. Osborne pushes too hard against the bonus cap, his government risks criticism at home for succoring bankers. They are unpopular with large swaths of the British electorate for earning lavish salaries even as a prolonged economic downturn forces many households to scrimp. Many voters also resent the banking industry for receiving a series of giant bailouts paid for by taxpayers.

The meeting Tuesday will follow a Monday evening session by 17 of the same finance ministers, representatives of the euro currency union, who discussed but deferred action on a bailout request by Cyprus. That country is seeking about €17 billion, $22 billion, to shore up government finances and its banks, which were badly exposed to a debt write-down in Greece.

But for Britain, which is not a member of the euro zone, the banker bonus proposal is the main issue. The Cameron government considers the bonus cap “misguided and fear it could impact negatively on London without even combating the excessive risk-taking it was meant to address,” said Simon Tilford, chief economist at the Center for European Reform, a research organization based in London.

“But London is caught between a rock and a hard place, as there’s much popular antipathy toward the bankers,” Mr. Tilford said. The issue of banker remuneration “is pretty toxic stuff Britain,” he added.

Further undermining Britain’s position ahead of the meeting is the result of a referendum over the weekend in Switzerland, also known for its business-friendly climate but where voters approved tighter restrictions on executive compensation. That vote will give shareholders of companies listed in Switzerland a binding say on the overall pay packages for executives and directors.

The bonus cap legislation that concerns the British leadership cleared an important hurdle last week when representatives of E.U. governments and the European Parliament agreed that the coveted bonuses many bankers receive would be capped at no more than their annual salaries, starting next year. Only if a bank’s shareholders approved could a bonus be higher — and even then it would be limited to no more than double the salary.

The rules are drafted so that a banker working in New York for a British bank like Barclays would be subject to the rules, as would a banker in London working for a U.S. bank like Citigroup.

Another reason Mr. Osborne may be hesitant to oppose the bonus rules too vociferously is that they are part of a legislative package that includes something his government favors: tougher rules about how much capital European banks most hold in reserve to protect against losses.

Britain and Mr. Osborne have strongly backed the higher capital requirements as essential for preventing another financial crisis.

In any event, European Union diplomats said ministers were unlikely to formally approve the rules on Tuesday because details still needed to be nailed down. That could still give Britain weeks, or even months, to press for concessions.

There are also questions among some European countries about how strictly to apply parts of the legislation requiring banks to publish detailed information on profits, taxes and subsidies on a country-by-country basis across the globe.

In the case of the separate Cyprus bailout discussions Monday evening, euro zone finance ministers were taking up talks that stalled with the country’s previous, Communist-led government. That government was replaced late last month by a center-right administration, a change that has been welcomed in other European capitals.

Article source: http://www.nytimes.com/2013/03/05/business/global/05iht-euro05.html?partner=rss&emc=rss

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Economix Blog: A Taste for Whole Foods (or Roman Tubs)

March 1, 2013 by Leave a Comment

CATHERINE RAMPELL

CATHERINE RAMPELL

Dollars to doughnuts.

A couple weeks ago I wrote about the cost of living in different cities, and how one of the challenges for intercity comparisons is that the basket of goods the typical consumer buys varies from place to place. Tastes differ greatly by geography and by socioeconomic class, and often those two forces interact in ways that are not captured by cost-of-living indexes.

Trulia, a real estate Web site, illustrated that nicely in a recent semantic analysis of housing ads from the start of 2012 through late November. The company’s chief economist, Jed Kolko, looked at the phrases associated with particular markets to find features that were at least 10 times more likely to appear in listings in a particular metro area than they were nationally:

 

These are not the kind of things items that are likely to show up in a traditional cost-of-living index, but they do say a lot about what residents in different areas value and are likely to spend money on.

I love, for example, that “mirrored closet doors” are so attractive to homeowners in Southern California (and am admittedly confused about the “Roman tub” preference in my birthplace of West Palm Beach). But perhaps one of the most telling items on the list is “Whole Foods” in San Francisco. As Mr. Kulko writes:

Some hyperlocal phrases appear in a particular metro not because it’s unique to that metro – San Francisco is hardly the only place in the country with a Whole Foods – but because that feature appears to be especially important to house hunters there. Southern Californians might like to admire themselves in their mirrored closet doors, but many San Franciscans would be happier living next to – or even directly above – Whole Foods.

San Francisco is undoubtedly expensive if you’re poor. But maybe it’s not so expensive if you’re rich and have standard rich-person tastes for high-end products like organic food, given how many Whole Foods and related competitors are nearby and willing to compete for your business.

Article source: http://economix.blogs.nytimes.com/2013/03/01/a-taste-for-whole-foods-or-roman-tubs/?partner=rss&emc=rss

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Small Businesses Struggle, Impeding a Recovery

February 13, 2013 by Leave a Comment

In survey after survey, owners of small businesses report unbridled pessimism about the economy. The small-business optimism index from the National Federation of Independent Business — a major industry group for small businesses that surveys a sample of its members each month — is stuck at recessionary levels. In January’s report, released this week, expectations for business conditions six months from now were at their fourth-lowest reading in nearly 40 years.

Comparable measures for large companies have exceeded their prerecession levels. That is partly because big companies have a larger global footprint, so they are benefiting from strong growth in places like China and India. Small businesses are more closely tied to the leaden domestic economy, said Paul Ballew, chief analytic and data officer at Dun Bradstreet, so weak growth at home is weighing more heavily on them.

That gulf in optimism between small and large companies seems to widen, though, during occasions of greater policy uncertainty and Washington gridlock — including the present. And while small businesses always grumble about taxes and regulation, they are especially likely to do so now. Asked by the National Federation of Independent Business about their “single most important problem,” small-business owners are now as likely to name taxes or government requirements as they are to name sales, which had reigned supreme from September 2008 until mid-2012.

“Politicians are uniformly quick to offer paeans to small businesses, but their actions have directly held back the sector, to the huge detriment of the economy,” said Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors. “The timing of this latest slump is particularly frustrating because the key precondition for a real small-business recovery — the normalization of bank lending to commercial and industrial companies — is within reach.”

It is unclear why policy and economic uncertainty would be taking a greater toll on small versus large businesses.

Smaller companies might have be more alarmed by headlines about the debt ceiling and fiscal tightening because they don’t have armies of in-house analysts to advise them about relative risks, said Nicholas Bloom, an economics professor at Stanford who maintains an index on policy uncertainty.

Smaller businesses are also more fixated on domestic uncertainty because they are less diversified than big firms — both geographically and in terms of product lines — and so have smaller margins for error. The last several years have offered multiple false starts in the domestic economy (remember “Recovery Summer” in 2010?), and small businesses that acted on any sense of optimism often found themselves badly burned.

Ralph Jensen, president of Pro Data IV, a nine-person accounting and bookkeeping firm in Green Bay, Wis., has watched and learned. He would like to open another office in Appleton, about 30 miles south, and hire a new employee. But he is concerned about how another blowup in Washington, or at the very least lingering uncertainty about tax increases and spending cuts, might affect his clients’ expansion plans.

Unlike a big company that can take a tax write-off for investing in space or equipment it ends up not needing, “I just don’t have much wiggle room if I fail,” he said.

Before he would feel comfortable expanding, he said, “I’d have to see my business is growing consistently for a long time, and I would have to have really, really strong faith in the fact that people were going to be opening more businesses around here that would be looking for services like mine.”

No matter what fiscal showdown Washington might have in the coming weeks, recent Congressional decisions have already had concrete effects on the economic security of small businesses.

Many business owners report continued confusion about what their health care liabilities will be in 2014, for example, when some employers will be required to offer health insurance and other changes to health benefits kick in.

Owners who sell directly to consumers say they are also concerned about the effects that Congress’s recent tax increases, like the end of the payroll tax holiday, will have on their bottom line.

“You know I’m in kind of a unique situation in that I don’t sell anything that anybody needs, the way you need groceries or some other things,” said Jason Starkey, the owner of Starkey Products, in Orange City, Fla., which sells lighting products and other accessories that are installed in new cars. “I know I’ve noticed the tax hike that just occurred, so people making $50,000 to $60,000, the people who buy our products, must be noticing it, too.”

Article source: http://www.nytimes.com/2013/02/14/business/smallbusiness/small-businesses-struggle-impeding-a-recovery.html?partner=rss&emc=rss

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I.M.F. Forecast: Global Economic Growth Modest at Best

January 23, 2013 by Leave a Comment

WASHINGTON — The International Monetary Fund said on Wednesday that it continued to expect a modest upturn in global growth in 2013, with fewer risks of major policy mistakes and lower levels of financial stress.

The fund cautioned, however, that growth is hardly expected to snap back to pre-crisis levels in the coming years. Over all, the fund sees global growth of 3.5 percent in 2013 and 4.1 percent in 2014, up from 3.2 percent in 2012. In the years just before the global downturn, annual economic growth ranged between 4.5 and 5.5 percent.

“If crisis risks do not materialize and financial conditions continue to improve, global growth could be stronger than projected,” the Washington-based fund said in its economic report. “However, downside risks remain significant, including renewed setbacks in the euro area and risks of excessive near-term fiscal consolidation in the United States. Policy action must urgently address these risks.”

The fund issued a routine update to the projections it makes in its twice-yearly World Economic Outlook report. This time, it whittled down many of the forecasts for 2013 that it had made in October, knocking 0.1 percentage point from its United States growth forecast, 0.3 percentage point from the euro area and 0.4 percentage point from the newly industrialized Asian economies, like Singapore and South Korea.

Still, it noted that financial stresses and the risk of a major policy shock in Europe and the United States have decreased. “Optimism is in the air,” said Olivier Blanchard, the fund’s chief economist, at a press conference on Wednesday. “Some cautious optimism may indeed be justified,” he added. “We may have avoided the cliffs, but we still face high mountains.”

The fund said it downgraded its estimate of European growth from October despite “progress in national adjustment and a strengthened European Union-wide policy response to the euro area crisis.” It said that there might be “delays” as lower sovereign-bond yields and reduced financial stress eventually translate into improved private-sector borrowing conditions. It added that uncertainty about the ultimate resolution of the long-simmering European debt crisis remains high.

Mr. Blanchard said that policy challenges “clearly” remain highest in certain European countries struggling with large debt burdens and slow-growing economies. He said business competitiveness and exports had improved recently, but high interest rates, pressure for budget cuts and uncertainty continued to depress growth.

Slow growth in advanced economies, including the United States, Germany and Japan, will continue to weigh on growth in emerging economies, the fund said.

Mr. Blanchard noted that financial markets have become considerably more sanguine over the past year, with the European Central Bank starting a major new bond-buying program and the United States avoiding the worst of the so-called fiscal cliff package of tax increases and budget cuts. He said that could be a sign that the financial markets are experiencing some kind of “bubble” but also said that investors could be “seeing things which are truly good.” Ultimately, with less financial stress, the real economy should pick up, thus explaining the market optimism, he said.

In terms of policy advice, Mr. Blanchard said that his “main message” would be that “financial market optimism should not lead to policy complacency.”

For Washington, the “priority is to avoid excessive fiscal consolidation in the short term, promptly raise the debt ceiling and agree on a credible medium-term consolidation plan,” the fund’s economists said. Christine Lagarde, managing director, and other fund officials have repeatedly warned politicians in Washington not to embark on too stringent an austerity program, for the good of the world economy as well as the United States.

At the news conference, Thomas Helbling of the I.M.F.’s research division said that the United States faced a “long-term” fiscal problem, with much of the policy challenge resting in bringing down health care spending over time. He said that the challenge seemed “doable,” and stressed that other countries faced far more wrenching adjustments.

This month, its sister institution, the World Bank, released a rosier economic analysis. It foresees global growth of just 2.4 percent in 2013. But it said that emerging economies could worry less about downside risks from advanced economies and start focusing on domestic economic issues, like labor-market or regulatory reforms.

Article source: http://www.nytimes.com/2013/01/24/business/economy/imf-forecast-global-economic-growth-modest-at-best.html?partner=rss&emc=rss

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Today’s Economist: Simon Johnson: The Legacy of Timothy Geithner

January 17, 2013 by Leave a Comment

Timothy F. Geithner, who is stepping down as Treasury secretary, with President Obama at the White House last week.Larry Downing/Reuters Timothy F. Geithner, who is stepping down as Treasury secretary, with President Obama at the White House last week.DESCRIPTION

Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

“Too big to fail is too big to continue. The megabanks have too much power in Washington and too much weight within the financial system.” Who said this and when?

Today’s Economist

Perspectives from expert contributors.

The answer is Peggy Noonan, the prominent conservative commentator, writing recently in The Wall Street Journal.

As Timothy F. Geithner prepares to leave the Treasury Department, most assessments focus on how his policies affected the economy. But his lasting legacy may be more political, contributing to the creation of an issue that can now be seized either by the right or the left. What should be done about the too-big-to-fail category of financial institutions?

Mr. Geithner came to Treasury in the middle of a severe financial crisis, a set of problems that he helped to create and then worked hard to prevent from worsening. As president of the Federal Reserve Bank of New York, starting in 2003, he watched over – and failed to defuse – the buildup of systemic risk. In fact, the New York Fed was relatively on the side of allowing large, seemingly sophisticated financial institutions to fund themselves with more debt relative to their thin levels of equity.

This was a major conceptual mistake for which there still has not been a full accounting. In fact, blank denial continues to be the reaction from the relevant officials.

Mr. Geithner was also in the hot seat as more explicit government support for large financial institutions began in earnest in early 2008. The New York Fed brokered the sale of failing Bear Stearns to relatively healthy JPMorgan Chase, with the Fed providing substantial downside insurance to JPMorgan, against potential losses from assets they were acquiring.

Mr. Geithner also acquiesced to Jamie Dimon, the chief executive of JPMorgan Chase, allowing him to remain on the board of the New York Fed even as his bank was suddenly the recipient of very large additional subsidies (the insurance for his acquisition of Bear Stearns). This was the beginning of a deeper public realization that there had come to be too little distance between some parts of the Federal Reserve and the big banks.

For some senior officials within the Federal Reserve System, the appearance of this potential conflict of interest was a cause for grave concern. Unfortunately, their concerns were ignored by the New York Fed and by leadership at the Board of Governors in Washington. The result has been damage to the Fed’s reputation and an unnecessary slip toward undermining its political independence.

From March 2008, when Bear Stearns almost failed, through September 2008, very little was done to reduce the level of risk in the financial system. Again, Mr. Geithner must bear some responsibility.

In fall 2008, Mr. Geithner worked closely with Henry Paulson – Treasury secretary at the time – in an attempt to prevent the problems at Lehman Brothers from spreading. They were unsuccessful, in fairly spectacular fashion. The failure to anticipate the difficulties at American International Group must stand out as one of the biggest lapses ever of financial intelligence – again, a responsibility in part of the New York Fed (although surely other government officials share some blame).

As the problems escalated, Mr. Geithner came to stand for providing large amounts of unconditional support for very big banks – including Citigroup, where Robert Rubin, his mentor, had overseen the dubious hiring of a chief executive and more general mismanagement of risk. (While a director of Citigroup, Mr. Rubin denied responsibility for what went wrong.)

Rather than moving to change management, directors or anything about the big banks’ practices, Mr. Geithner favored more financial assistance – both from the budget (through various versions of the Troubled Asset Relief Program), from the Federal Reserve (through various kinds of cheap loans) and from all other available means, including insurance for private debt issues provided by the Federal Deposit Insurance Corporation.

In official discussions, Mr. Geithner consistently stood for more support with weaker (or no) conditions. (See “Bull by the Horns,” by Sheila Bair, former chairwoman of the F.D.I.C., for the most credible account of what happened.)

Mr. Geithner’s appointment as Treasury secretary in January 2009 allowed him to continue to scale up these efforts.

In retrospect, what helped stem the panic was the joint statement of Feb. 23, 2009, issued by the Treasury, the F.D.I.C., the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Reserve, that included this statement of principle:

The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses. The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth. Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments.

Mr. Geithner is often given credit for pushing bank stress tests in spring 2009 as a way to back up this statement, so officials could assess the extent to which particular financial institutions needed more loss-absorbing equity. But such stress tests are standard practice in any financial crisis.

Much less standard is unconditional government support for troubled banks. Usually such banks are “cleaned up” as a condition of official assistance, either by being forced to make management changes or being forced to deal with their bad assets. (This was the approach favored by Ms. Bair when she was at the F.D.I.C.; her book lays out realistic alternatives that were on the table at critical moments. The idea that there was no alternative to Mr. Geithner’s approach simply does not hold water.)

Any fiscally solvent government can stand behind its banks, but providing such guarantees is a recipe for repeated trouble. When Mr. Geithner was at Treasury in the 1990s and Mr. Rubin was Treasury secretary, the advice conveyed to troubled Asian countries – both directly and through American influence at the International Monetary Fund – was quite different: clean up the banks and rein in the powerful people who overborrowed and brought the corporate sector to the brink of financial meltdown.

In Mr. Geithner’s view of the world, the 2010 Dodd-Frank financial reform legislation fixed the problem of too-big-to-fail banks. Outside of Treasury, it’s hard to find informed observers who share this position. Both Daniel Tarullo (the lead Fed governor for financial regulation) and William Dudley (the current president of the New York Fed) said in recent speeches that the problems of distorted incentives associated with too big to fail were unfortunately alive and well.

Ironically, despite the fact that the Obama administration failed to rein in the megabanks and allowed them to become larger and arguably more powerful, this has not helped the Republicans in electoral terms.

As Ms. Noonan puts it bluntly: “People think the G.O.P. is for the bankers. The G.O.P. should upend this assumption.”

This is a significant opportunity for anyone with clear thinking on the right – someone looking for a Teddy Roosevelt trustbusting or Nixon-goes-to-China moment. Again, Ms. Noonan gets it right: “In this case good policy is good politics. If you are a conservative you’re supposed to be for just treatment of the individual over the demands of concentrated elites.”

Recall that some grass roots conservatives are already there: House Republicans initially voted down TARP, the former presidential candidate Jon Huntsman’s plan to end too big to fail received widespread applause from many Republicans and a number of influential commentators, including George Will and Ms. Noonan, have advocated ending too big to fail.

This would play well in the Republican presidential primaries – and even better in the general election. Watch PBS “Frontline” on Jan. 22 for an articulate presentation of why serious potential financial crimes were not prosecuted during the first Obama administration, and think about how to turn these facts into political messages.

A smart candidate could even mobilize plenty of financial-sector support in favor of breaking up or otherwise restricting the too-big-to-fail financial entities. The megabanks have very few genuine friends.

The lasting legacy of Timothy Geithner is to create the perfect electoral issue for Republicans. Will they seize it?

Article source: http://economix.blogs.nytimes.com/2013/01/17/the-legacy-of-timothy-geithner/?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

You’re the Boss Blog: N.F.I.B. Suffers the Post-Election Blues

December 13, 2012 by Leave a Comment
The Agenda

How small-business issues are shaping politics and policy.

The news from the National Federation of Independent Business on Tuesday was grim, very grim indeed. Confidence among small-business owners — or, more precisely, among a certain subset of small-business owners — dropped precipitously in November, as gauged by the organization’s Small Business Optimism Index. And the reason for the pessimism, said the N.F.I.B.’s chief economist, Bill Dunkelberg, was clear: President Obama won re-election.

“Something bad happened in November — and based on the N.F.I.B. survey data, it wasn’t merely Hurricane Sandy,” Mr. Dunkelberg said in a news release accompanying the report (pdf). “The storm had a significant impact on the economy, no doubt, but it is very clear that a stunning number of owners who expect worse business conditions in six months had far more to do with the decline in small-business confidence.”

The indications of pessimism in the Optimism Index, which is drawn from the N.F.I.B.’s monthly Small Business Economic Trends survey, were myriad. More businesses anticipated lower, rather than higher, sales in the next quarter. More owners think it will be harder to get loans. And the share planning capital investment in the next three to six months fell. Most jarringly, as The Times noted Wednesday, the net percentage of business owners who expected business to improve over the next six months — that is, the share of respondents who predicted improvement less the share who anticipated decline — fell to negative 35 percent, down 37 points from October’s very modest, but positive, reading.

Of course, there is good reason for any business to be concerned about 2013 — many economists agree that if the simultaneous tax increases and spending cuts scheduled to take effect at the beginning of the year (the “fiscal cliff”) aren’t averted or adjusted, the country will plummet into another recession. But here’s something to keep in mind about the N.F.I.B.’s measure of despair: The survey is not a random sample of small-business owners; it is a random sample of small-business owners who are N.F.I.B. members. And as you might imagine, that is a fairly self-selected lot.

The N.F.I.B., after all, has been known to take strong conservative positions on economic issues, even when those positions seem to conflict with its members’ tangible self-interests. (N.F.I.B. officials say that most small-business owners share conservative views about the role of taxes and government, but some — those who vote Democratic — just aren’t as emphatic about it.) Although an N.F.I.B. spokeswoman, Cynthia Magnuson-Allen, said that the organization has never polled its members on their party affiliation, it is understood by many in Washington to be a Republican constituency. In the Congressional elections last month, the N.F.I.B. endorsed 307 candidates, of which 303 were Republicans. Of those, 48 of 279 candidates for the House lost, and 16 of 24 Republicans lost their Senate races.

It is not entirely surprising, then, that for N.F.I.B. members, November offered little reason to be thankful.

Article source: http://boss.blogs.nytimes.com/2012/12/13/n-f-i-b-suffers-the-post-election-blues/?partner=rss&emc=rss

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